Wednesday, September 22, 2010

A Separation between Economy and State

Everyone seems to agree that the separation between church and state is a good thing. You don't want ministers legislating morality, and you don't want a "theocracy." When the political and the religious collapses into one, especially in the modern era of secular religions, you get tyranny and terror.

But what about separating economy and state? For some reason there is a lot less enthusiasm for that.

But why? The record on government meddling in the economy is dismal. Since time immemorial governments have abused their power to regulate currency, visiting untold miseries on their people. And governments have often thought that they had a much better idea of how to run a business than the business owners themselves. Has there ever been a case when a government has actually picked a winner?

At the US founding, people were divided about whether to encourage an agricultural economy or a manufacturing economy, the famous divide between Jefferson the landowner, and Hamilton the businessman, lawyer, administrator, and central banker. In the event their posturing was meaningless. The economy flowed and swelled into thousands of channels, more or less ignoring the government when it could. The federal government did have a lot of influence, of course, mainly by screwing up the credit system again and again.

Of course, nobody is suggesting that the economy should be completely separate from government. Business needs settled and predictable law about thousands of things, and it needs government force, on occasion, to enforce contracts that have gone bad, and wind up the affairs of bankrupts.

We stand at a moment that is particulary propitious for a change in the relationship between the economy and the state. We have had a particularly nasty banking and credit crisis mostly caused by government meddling in the market for housing credit. Government has encouraged, over the last century, reckless lending and borrowing for home mortgages. That is to say, the government has encouraged homeowners to get mortgages loans very close to the value of their homes. As we have seen, that sort of thing creates a systemic risk. When millions of homeowners can't pay their mortgages and/or have mortgages underwater, it raises questions about the solvency of major financial institutions, from banks to government-sponsored enterprises like Fannie and Freddie.

There are, obviously, bound to be occasions when the financial system will fail. I am thinking of nuclear war devastation and an asteroid collision. But it is unacceptable to have a financial system that fails in peacetime. When that happens there is only one answer. The system was set up to fail.

We know why the system failed. It was corrupted and weakened by a thousand different government interventions where the government warped the economic system to achieve political ends, and reserved the power to intervene in routine economic relationships for political gain.

Of course, businesses play their part in this racket. They importune for subsidies and privileges on the grounds of national defense or energy security, or local economic benefit. Usually, they are merely trying to raise the bar against new entrants into their business.

Obviously we can't change everything overnight. The government has got into the micro-management of business over decades, and a reckless change would be foolish. But here are some principles that could guide us in separating the economy from the state.

  1. Privatize the credit system. The government has utterly failed to manage the monetary and credit system safely. In fact it has used it, again and again, for political gain.
  2. More equity, less debt. Two hundred years ago we needed banks because there wasn't a big market in debt and equity securities. Today equity is easy, and it could be cheap.
  3. No government businesses. They are inefficient and they compete unfairly.
  4. No administrative regulation. In the recent meltdown the SEC failed, the Fed failed, the regulators of Fannie and Freddie failed. So what's the point?
  5. No more subsidies. Subsidies just encourage corruption, and waste resources.

Well, that's a start. The fact is that government is terrible at supervising business, and business ought to keep its hands out of bribing politicians. If they can do that, then we will all benefit, for it is the wealth created by business that provides revenue for government and it is the regime of peace provided by government and the performance of promises supported by law that allows business to thrive.

Surely that's something we can all agree on.

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